Changing times at the US Treasury

The huge fluctuations of October 2014 in the Treasury market are regarded as strong indications of how much that market has changed since the financial crash, and a portent for future times as we see less and less of the traditional dealer-dominated model.

Borut Miklavcic, Chief Investment Officer at Lindengrove Capital, said that the market has fundamentally changed. "If you ignore it, you are fooling yourself", Mr Miklavcic commented. 

Besides being a fundamental mechanism for the US government and global financial markets alike to raise capital, the Treasury market is also key to regulators, dealers and the modern era's automated investors, so any trend changes are of great significance. 

As we have witnessed the proliferation of electronic trading over recent years, traders who have traditionally enjoyed strength within the market have taken a step back as capital constraints have brought more stringent regulation; new principle trading firms have picked up the baton.

Parallel to this development, the Treasury debt market has more than tripled from $4.5tn to $12.6tn since 2007, while liquidity - the ease of buying and selling bonds in large size without affected price - has languished. 

Jack Flaherty, Investment Director at GAM, has labelled the changes as a wake-up call to a lot of people. "Some had said it could happen but you only sort of believed it was possible", Mr Flaherty added.

The slowdown in dealer activity, the dawn of computerised trading and the liquidation of bets on higher interest rates are considered the key contributing factors to the acute swing in bond prices in yields, according to the largest US regulators. 

Investors may start to demand a higher yield for funding in the US government's debt, should they feel that spells of volatility will characterise the future of Treasury trading.

In a recent report, US regulators said that "changes in market structure and liquidity could also have implications for the cost of financing the government", because of the US Treasury market's unique role. 

The report also advised that more be done to understand the market's dynamic structure and that a review should be constructed into automated trading systems.